FASTPACK Manufacturing produces filament packaging tape. In 2014, FASTPACK produced and sold 15,000,000 rolls of tape. The company has recently expanded its capacity, so it now can produce up to 30,000,000 rolls per year. FASTPACK’s accounting records show the following results from 2014:
Sale price per roll ................................................................. $ 3.00
Variable manufacturing costs per roll................................... $ 2.00
Variable marketing and administrative costs per roll............ $ 0.50
Total fixed manufacturing overhead costs............................ $8,400,000
Total fixed marketing and administrative costs .................... $1,100,000
Sales ..................................................................................... 15,000,000 rolls
Production ........................................................................... 15,000,000 rolls
There were no beginning or ending inventories in 2014.
In January 2015, FASTPACK hired a new president, Kevin McDaniel. McDaniel has a one-year contract that specifies he will be paid 10% of FASTPACK’s 2015 absorption costing operating income, instead of a salary. In 2015, McDaniel must make two major decisions:
● Should FASTPACK undertake a major advertising campaign? This campaign would raise sales to 24,000,000 rolls. This is the maximum level of sales FASTPACK can expect to make in the near future. The ad campaign would add an additional $2,300,000 in fixed marketing and administrative costs. Without the campaign, sales will be 15,000,000 rolls.
● How many rolls of tape will FASTPACK produce?
At the end of the year, FASTPACK’s Board of Directors will evaluate McDaniel’s performance and decide whether to offer him a contract for the following year.
Requirements
Within your group, form two subgroups. The first subgroup assumes the role of Kevin McDaniel, FASTPACK’s new president. The second subgroup assumes the role of FASTPACK’s Board of Directors. McDaniel will meet with the Board of Directors shortly after the end of 2014 to decide whether he will remain at FASTPACK. Most of your effort should be devoted to advance preparation for this meeting. Each subgroup should meet separately to prepare for the meeting between the Board and McDaniel.
Kevin McDaniel should
1. Compute FASTPACK’s 2014 operating income.
2. Decide whether to adopt the advertising campaign. Prepare a memo to the Board of Directors explaining this decision. Give this memo to the Board of Directors as soon as possible (before the joint meeting).
3. Assume FASTPACK adopts the advertising campaign. Decide how many rolls of tape to produce in 2015.
4. (Given the response to Requirement 3) prepare an absorption costing income statement for the year ended December 31, 2015, ending with operating income before bonus. Then compute the bonus separately. The variable cost per unit and the total fixed costs (with the exception of the advertising campaign) remain the same as in 2014. Give this income statement and bonus computation to the Board of Directors as soon as possible (before the meeting with the Board).